The Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points to 4.85% on Melbourne Cup Day, marking the highest level in 18 years. The move was driven by persistent inflation, which remains above the RBA’s target band despite earlier rate hikes. Headline inflation stood at 4.3% over the year to September, with the trimmed mean at 3.7% over the same period. The RBA noted that domestic capacity pressures are the primary challenge, even as economic growth moderates.
Household spending has shown resilience, with a 6.9% increase in discretionary spending over the year to September. However, this masks significant disparities, as 31.8% of mortgage holders, about 1.75 million households, were at risk of mortgage stress in September. The RBA expects this number to rise to approximately 1.82 million following the latest rate hike.
While mortgage rate increases grab public attention, the RBA’s modelling indicates that up to two-thirds of the effect of interest rates on the economy comes through the exchange rate channel. Since the start of the year, the Australian dollar has appreciated from 67 to 70 US cents, which helps moderate inflation by making imported goods cheaper.
The RBA remains cautious, warning that allowing inflation to stay elevated risks embedding higher inflation expectations. The Board will monitor upcoming inflation data to assess whether domestic price pressures are easing, but further tightening remains possible if inflation proves more persistent than expected.